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Sunny Optical Technology 2382 HK Summary

Core Content

Sunny Optical Technology is a leading optical component manufacturer in the China technology supply chain, with a focus on optical components and modules for smartphones, vehicles, and other applications. The company has a strong presence in the Greater China market and is the world's largest provider of vehicle lenses, holding a global market share of approximately 30%.

The report outlines the company's current financial performance and future growth prospects, highlighting the long-term growth potential from the vehicle lens segment and the near-term risks in the handset camera module (HCM) business. It also includes an investment recommendation and valuation analysis.

Main Points

Investment Recommendation

• Rating: Hold (3)
• Target Price (HKD): 15.80
• Upside: 4.2%
• Current Price (3 Aug): 15.16

The stock is currently trading at 13.6x 2016E PER, which is viewed as fair given its strong earnings outlook and robust ROE. However, the report suggests that the market's earnings expectations are overly optimistic, leading to the initiation of coverage with a Hold rating.

Business Outlook

• Smartphone Segment:

  • HCM business is the main revenue driver, contributing over 70% of revenue.
  • Revenue growth is expected to slow in the second half of 2015 due to increased competition and slowing smartphone demand in China.
  • HCM volume growth is forecasted at 16% YoY in 2H15, down from 26% in 1H15 and 57% in 2H14.
  • Gross margin for HCM is expected to remain flat at 12% in 2H15, worse than historical patterns and market expectations.

• Vehicle Lenses:

  • Expected to be a long-term earnings growth driver.
  • Global market share is approximately 30%, with a forecasted 45% CAGR in shipments for 2014-2017.
  • Vehicle lenses are expected to contribute 22% of gross profit in 2017, up from 13% in 2014.
  • The vehicle lens business has a relatively high gross margin of around 40%, compared to 12% for HCM.

Financial Highlights

• Revenue (CNYm):
  • 2015E: 10,890
  • 2016E: 12,930
  • 2017E: 15,020
• Net Profit (CNYm):
  • 2015E: 775
  • 2016E: 978
  • 2017E: 1,219
• Core EPS (fully-diluted):
  • 2015E: 0.707
  • 2016E: 0.892
  • 2017E: 1.111
• EPS Growth:
  • 34% YoY in 2015
  • 26% YoY in 2016
• Gross Margin:
  • 2015E: 16.1%
  • 2016E: 16.3%
  • 2017E: 17.0%
• ROE:
  • 2015E: 21.8%
  • 2016E: 23.1%
  • 2017E: 24.0%

Valuation

• 12-Month Target Price: HKD15.8
• Valuation Multiple: Based on 16x average 2015/16E EPS, which is 1 SD above the stock's past-3-year average of 13x.
• PER (2015E): 17.2x
• PER (2016E): 13.6x
• PBR (2015E): 3.5x
• PBR (2016E): 2.9x
• EV/EBITDA (2015E): 11.6x
• EV/EBITDA (2016E): 9.0x
• EV/EBITDA (2017E): 6.9x

Key Risks

• Upside Risk: Better-than-expected HCM sales
• Downside Risk: Greater-than-expected competition in the HCM business

Share Price Performance

• 12-Month Range: 9.40 - 19.60
• Current Price (3 Aug): 15.16

Market and Industry Trends

• ADAS Adoption: Expected to surge, increasing the number of cameras per vehicle.
• Autonomous Driving: The next step beyond ADAS, expected to further drive vehicle camera shipments from 2020 onwards.
• Global Vehicle Camera Shipments (m units):
  • 2014: ~40m
  • 2018E: 153m
• Camera per Vehicle (2014): 1.51
• Camera per Vehicle (2018E): 2.38

Company Profile

• Founded in 1984
• Major customers include Huawei, Lenovo, and OPPO
• Initially a glass lens supplier for digital still cameras (DSCs) and optical instruments
• Entered the handset optical segment in 2003
• Expanded into vehicle lens and handset lens segments in 2014

Summary

Sunny Optical is expected to benefit from long-term growth in the vehicle lens segment, driven by the adoption of ADAS and autonomous driving. However, near-term risks in the HCM business, including increased competition and slowing smartphone demand in China, may impact its performance. The company's financials show solid earnings growth, but the market's optimistic expectations may not be fully justified. The report initiates coverage with a Hold rating, suggesting that the stock is fairly valued but investors should be cautious about the near-term challenges in the HCM segment.